Indonesia acted decisively to clean up some of its most troubled banks
on August 21. But it will be at least another month before observers can
judge the plan's effectiveness. In announcing the reform, Finance
Minister Bambang Subianto naturally stressed the good news: The
decisions to close three banks, rehabilitate two and put two others up
for sale, he said, were "key milestones" in Indonesia's journey towards
economic recovery.
The news has been generally well received. On August 25, even
the
International Monetary Fund showed its support by approving a $1 billion
loan payment to the country. But beyond nationalizing these banks, the
government must also recoup trillions of rupiah owed to them and other
institutions -- much of it by companies owned by friends and family of
former President Suharto. Whether Jakarta can do this, and, even if it
does, whether that will be enough to revive the economy, remains highly
suspect, say observers.
Among the seven banks targeted by the new reform plan, two are
particularly noteworthy. Bank Umum Nasional, which is slated for
closure, is co-owned by Suharto's golfing partner and former cabinet
minister Mohamad "Bob" Hasan. And Bank Central Asia, which may be
rehabilitated, is 30%-owned by Suharto's children, while the controlling
interest belongs to Liem Sioe Liong -- one of the country's most
powerful ethnic-Chinese businessmen and Suharto crony.
The first chance for the government's plan to show its teeth
will
come on September 21. That's when BCA is due to settle a
30-trillion-rupiah ($2.6 billion) emergency loan it received from the
Indonesian Bank Restructuring Agency after a potentially devastating
bank run when Suharto fell in May.
Already, Ginandjar Kartasasmita, Indonesia's top economics minister,
has hinted that a deal involving Liem's Salim group could be in the
offing. He has said that Liem's stakes in three Salim companies --
noodle-maker Indofood, car assembler Indomobil and cement group
Indocement -- could serve as partial payment. If Salim doesn't have to
pay a substantial amount more than the 10 trillion rupiah the stakes are
valued at, he could get a good deal, say analysts.
However, Lin Che Wei, a Jakarta-based regional banking analyst
at SG
Research, is sceptical about the government's ability to recover
significant sums from delinquent bank owners like Salim. "Except for the
reputation of existing shareholders, the government has very little
leverage to recover the money," he says.
Indeed, across the board, the new plan appears to have numerous
holes. The government has not offered a comprehensive solution that's
fair and least-costly for taxpayers, says Lin. Others say the government
has yet to announce how exactly it plans to recapitalize banks. It
hasn't identified funding sources, changed laws to allow foreign
ownership, or tackled the potentially explosive issue of "blanket
guarantees." The government's liability on these guarantees, which apply
to all deposits made in Indonesian banks, continues to rise as more
banks fail. Moreover, ailing state-owned banks still have not even
attempted to recover the billions of rupiah they lent to chronic
debtors, including Suharto-family businesses. The tough new bankruptcy
law that went into effect on August 21 has yet to be tested.
Much of the pain of Indonesia's banks is self-inflicted, since
many
violated a Bank Indonesia guideline by lending more than 20% of their
total loan portfolio to businesses run by their shareholders. "They had
become deposit collection machines which used the funds to finance their
private ventures," says a Jakarta-based equity analyst. According to
bankers in Jakarta, even as these banks were taking IBRA funds to keep
from going under, they continued their incestuous lending practices.
The amount of money funnelled into owner-controlled businesses
was
enormous. According to bankers who have seen internal audit reports,
78.4% of Bank Umum Nasional's total loan portfolio circulated through
various companies associated with its owners. Two of the other banks to
be closed show similar trends: 63.2% of loans at Bank Modern and 90.7%
at Bank Dagang Nasional Indonesia were lent to the owners' businesses.
The government has used these violations to try to recover money
from
the bank owners. Manila-based Paul Dickie, an Asian Development Bank
director closely associated with banking reforms in Asia, says: "They
lent too much, they got into trouble. Now the owners are being told to
be responsible and pay up."
Getting them to do just that is crucial to reforming Indonesia's
banking system and to ensuring that viable businesses have access to the
money they need. "Without the banking sector on track, sustainable
recovery is impossible," says K.H. Moinuddin, programmes manager at the
ADB in Manila. Moinuddin supervises the ADB's lending to Indonesia,
including a $1.5 billion financial-reforms component that is part of the
IMF's bailout package.
Beyond the problem of how the government will force debtors
to
settle, the sheer number of banks in Indonesia looms as another major
challenge. In the last decade, the number has risen from a handful to
more than 200, stretching the ability of the finance minister to
properly supervise. According to former Finance Minister Mar'ie
Muhammad, "less than a dozen banks will survive the present crisis."
The bad news that Finance Minister Bambang didn't tell, then,
is that
reforms will remain incomplete if banks don't pursue debtors -- no
matter how high-profile -- and sue them under the new bankruptcy laws.
Otherwise the adage that banks are places where little people save so
that big ones can borrow will haunt Indonesia. Stay tuned until
September 21.